How much of your credit should you be using?

Three young women shopping and discussing how much of credit you should use Three young women shopping and discussing how much of credit you should use Image:

In a Nutshell

VantageScore recommends a credit utilization rate of no more than 30 percent. Credit utilization describes how much credit you’re using. To calculate your utilization rate, divide your total balances by your total credit limits.

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Whether you’re 18 years old and have just received your first credit card or 60 years old with a wallet full of cards, it can be tempting to charge as much as you can.

However, you should beware of such a move. Using your credit cards regularly and making on-time payments can help you establish a longer, fuller credit history.

But there are risks associated with carrying any type of balance – especially a large one in relation to your credit limits.

We’ll help you determine how much of your credit you want to use, as well as offer easy steps you can take to decrease your utilization over time.

What is credit utilization?

Credit utilization describes how much credit you’re using. To calculate your utilization rate, divide your total balances by your total credit limits.

For example, if you’re carrying a $3,500 balance and you have $10,000 in available credit, you’d end up with a utilization rate of 35 percent.

Your credit utilization rate is one of the most important factors lenders use to assess your creditworthiness — for many scoring models, it accounts for roughly 20 to 30 percent of your score. Because of this, making sure your utilization is at a respectable level can help keep your credit healthy.

How much of your credit should you use?

But how much credit utilization is too much? VantageScore recommends a utilization rate of no more than 30 percent. Since carrying balances that represent a significant portion of your available credit could indicate you’re struggling financially, lenders might worry that you’ll have trouble paying it back.

It’s also important to keep in mind that your utilization rate is the percentage of credit you’re using across ALL of your credit cards. In other words, your utilization is calculated by totaling all of the balances you carry across each credit card you own — you don’t have a separate utilization rate for each card.

So if you’re carrying a $2,000 balance across three credit cards with a total available balance of $6,000, your utilization rate is 33 percent – even if you’re using 50 percent of one card’s limit and 10 percent of the other cards’ limits.

The risks of overutilization

If you have a high utilization rate, you may see a negative impact on your credit score.

Why is this? If your monthly statement constantly shows a high utilization rate, you may be seen as a higher risk and your credit score may decrease accordingly, even if you pay your balance in full each month and remain debt-free.

And let’s not forget the ultimate risk that comes with carrying a large balance — with credit card interest rates generally falling anywhere between 4.9 percent and 24.99 percent – or even higher — carrying a balance could result in huge interest charges as well. Over time, that means less money in your pocket.

4 tips for maintaining the right utilization percentage

If you want to use credit to your advantage and improve your credit health, it’s important to keep your utilization rate as low as possible. Here are some tips that can help you do that:

  • Keep more than one credit card open. Since having one card with a utilization percentage over 30 percent can hurt your score more than having that balance spread amongst several cards, it could pay to use more than one credit card. If you’re looking for a new line of credit to decrease your utilization, compare credit cards first to make sure you’re getting the best deal for your situation.
  • Pay your bills more than once per month. If your credit card bill has a tendency to creep up by the end of your billing period, submitting a payment more than once per month could help. This is typically easy if you take advantage of your card’s online bill pay feature.
  • Ask your card issuer for a credit limit increase. Asking your current credit card provider for a credit limit increase can be a great way to lower your utilization with limited effort on your part. And if you’ve used credit responsibly until now, there’s a good shot they will grant your request. However, it’s important to remember that this could result in a hard inquiry, which might cause your score to drop temporarily. Once you get that bigger credit line, remember not to increase your spending as well, or else you could negate the positive effects of having a larger limit.
  • Consider keeping your utilization above zero percent. Although keeping your utilization at zero percent might seem like the best way to go, banks may actually frown on it. Remember, they want to see that you’re using credit responsibly – not avoiding it altogether. Typically, the balance reported to the bureaus is your statement balance, not what you’re carrying over from month to month, so if you’d like to pay off your balance in full while still showing a positive utilization rate, consider strategically timing your payments.

Bottom line

Staying in the ideal utilization zone can be a tricky balancing act. Just remember, a little bit of credit use can go a long way, and you should never use a large credit line as an excuse to overspend.